Haiers, US Refrigerator Strategy

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1-Why did Haier enter the US market with compact refrigerators? (Ghemawat, Haier's
Strategy, 2009)

Market opportunity

Compact refrigerator was a category that US appliance leaders- with possible exception of GElargely ignored until recently and this product segment was rather disorganized. Haier could develop
distinctive products and work with the big national retail chains to establish itself as a leader in this
disorganized product segment.

Compact units were a growth market over the previous 15 years as living and office spaces were
upgraded, and as wine enthusiasts discovered storage cabinets. This was not just due to replacement
and number of new households but strongly was influenced by several other expansive factors -such
as changes in trends in consumers tastes and living patterns- as well. From 1970 through 2000 the
share of homeowners in the US who were either single or part of a nontraditional family unit rose
from 19% to 31% and this trend continued from 2000. The average size single-unit home in 2003
was 2320 square feet up from 1660 in 1973. 25% of new homes built now featured a home office
which they usually need compact refrigerators.

Compact refrigerators were the simplest in terms of design and features. This simplicity (less
complicated parts and subassemblies) would allow optimization in whole value chain (Design,
manufacturing, packaging, transportation, etc.)

Before Haier entrance in the US, a fragmented group of small specialty appliance players and foreign
brands supplied a limited range of compacts.
Why Haier?

Haier had already won a reputation among large retailers purchasing executives for reliability and
fast response to requests for product customization

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Zhang credited this success in compacts to ability to rapidly develop new niche, even novel,
products at the request of Wal-Marts executives. It would take only five months against 18 months
for western companies to develop a wine storage cabinet.

The other factor could be Zhang Rumins management style; importing technology from Germany
and employing Western concept of quality and customer satisfaction. And he tried to change Chinas
dysfunctional bureaucratic management style which was influenced by Japanese preoccupation with
quality and American style of pushing responsibility for results down in to the organization. And
referring to the case (Ghemawat, Haier's Strategy, 2009) it is obvious that he embedded the
capabilities into his organization by :

Celebrating individuals responsibility

Expecting rapid rate of innovations

Using OEC (Overall, Everyone, and Control and Clear) and rewarding top performers with
praise, visibility and bonuses

Making middle managers compete for each project and driving their bonuses by measurable
individual performance.

Even experimenting each new product engineer in an individual profit center

In this way Zhang set radical goals for the share of total revenues that had to come from new
products and Haiers actual product line strategy reflected these goals and incentives.
Considering the US as a very demanding market from quality and customer-orientation, and
the fact that major home appliance is an industry that demands great variety, flexibility in
customization for meeting customers demand and speed in doing that would be a tremendous
success factors.

2-Why was Haier successful in the compact refrigerators segment in the US market?

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Haier was successful because as mentioned before this market segment was rather neglected by big
companies and was disorganized, so in a way Haier found a Blue ocean or white spot to work in and
due to its cost advantages (difference in labor and manufacturing costs in China and US) and also the
fact that willingness to pay for products in US is stronger than China it was a good idea. The other
factor would be the alliance making with Michael Jemal who was a knowledgeable, successful
entrepreneur. In addition, the fit between Haiers unusual management style and US appliance market
should not be forgotten. Furthermore, successful implementation of adaptation and arbitrage strategies
will be discussed in the next question was another reason.

3-Referring to Ghemawats (2007) strategies for global value creation in the course main
textbook, how far do you consider Haiers success in the US market for compact
refrigerators is the result of it having implemented an adaption strategy ( adjusting to
differences)? An arbitrage strategy (exploiting differences)?
Arbitrage: Using CAGE Framework
Cultural: there was not a clear sign of using this element.
Administrative: South Carolinas state government provided financial incentives, including
three years of tax abatement and a discounted price on the land. In 1997 Chinese government
announced Haier as one of the six companies which state would support to become worlds
best 500 companies.
Geographical: Construction of its factory in South Carolina is an advantage.
Economical: Differences in costs of labor and capital, as well as variations in more industryspecific inputs (such as knowledge) or in availability of complementary products. Obviously,
Haier enjoys the difference between cost of labor between China and US.

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Cost of capital: Haier used Chinas government help as mentioned above and bearing in mind
that Haier was at least 30% state-owned.
A more detailed investigation can be found in Table 1
Table 1 ADDING Value via global expansion Haier for analysing arbitrage (Ghemawat, 2007)

Components of

Haiers achievements, attempts or intent

Value
Adding volume

Compact refrigerators were a category that US appliance leaders with the

possible exception of GE largely ignored until recently.

Compact units were a growth market over the previous 15 years as living and
office spaces were upgraded, and wine enthusiasts discovered home storage
cabinets.

Overall, Chinas domestic market for major appliances was relatively mature;
most urban households already had a refrigerator, washing machine, and
microwave oven. Unit growth was mainly in rural areas. In the cities, urban
households were upgrading their purchases by buying larger units with more
features. This was true for refrigerators, autos and other durables.

Despite holding roughly one-quarter of each major home appliance product

category in China, Haier found it difficult to earn high returns. CEO Zhang
consistently, complained of the malicious completion among the four China
producers.

LG and Samsung also used China as an export platform. Zhang further

complained that since Chinas entry into WTO in 2002, Every multinational
set up in China. Margins are low there. If we dont go outside, we cannot
survive

Decreasing Costs

The one kind of cross-country difference that does have a significant effect in
the opposite direction that is, it encourages cross-border expansion- is the
differences in labor costs, which account for 20-30 % of sales revenue for
domestic production in high-cost countries. (Ghemawat, 2007)

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R&D costs and costs of parts which are made in China are much lower, and
exchange rate of Yuan against USD, etc

Differentiation or

increasing
willingness to pay

customers purchasing power against Chinese ones WTP would be higher

Improving industry
attractiveness or

Apparently, via building an American brand and considering American

bargaining power

We should add Haiers fast responsiveness to customers requirements

Considering problems back home in China
Overall, Chinas domestic market for major appliances was relatively mature;
most urban households already had a refrigerator, washing machine, and
microwave oven. Unit growth was mainly in rural areas. In the cities, urban
households were upgrading their purchases by buying larger units with more
features. This was true for refrigerators, autos and other durables.

Despite holding roughly one-quarter of each major home appliance product

category in China, Haier found it difficult to earn high returns. CEO Zhang
consistently, complained of the malicious completion among the four China
producers.

LG and Samsung also used China as an export platform. Zhang further

complained that since Chinas entry into WTO in 2002, Every multinational
set up in China. Margins are low there. If we dont go outside, we cannot
survive

Normalizing or

optimizing the risk

expanding to US and adding volume risk of demand volatility would be lower

(due to having another market) but considering fluctuations in US economy
comparing to Chinas economy which has been growing for the past 25 years
the risks would increase.

But being successful in US market, automatically would open other market to

the firm which means expanding the portfolio of markets and less risk.

Generating

knowledge and
other resources
and capabilities

Working in a demanding market such as US would help firm learning to be

successful in other markets

Working with a successful American entrepreneur would help diffusing

American entrepreneurship into Chinese dysfunctional bureaucratic
management

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Working with huge retailers such as Wal-Mart would help them learning
about best class logistics and supply chain management.

Adaptation:

Labor & Transportation Costs: One of the important that persuade cross-border expansion is the
difference in labor costs- which can account for 20 to 30% of sales revenue for domestic production
in high-cost countries. But high transport costs should be considered. So, although Haier transport
many compact refrigerators from the lowest-cost production place in the world to US, high
transport costs prevent the profitable export of large refrigerators even before tariffs are taken into
account.

Industry economics: Regarding different expenditures e.g. advertising, R&D, and Labor- to
revenue ratio, home appliance industry is higher than median manufacturing industry, but is far
less than ninetieth percentile. Therefore, there is limited thrust to override the variety and
complexity required to compete across borders.
Adaptation levers

The first most obvious approach to adapting to differences across countries is variation.
(Electroluxs individualization) the second involves focus on particular geographies, products,
vertical stages and so forth as a way of reducing heterogeneity-like Haiers focus on compact-t.
The third involves externalization through joint ventures, partnerships etc- as a way of reducing
its internal burden. Haiers example of partnership with Michael Jemal as a way of adapting to the
unfamiliar requirements of the US market. Forth is design to reduce the cost of, rather than need
for variation. The final lever is innovation, which given its cross cutting effects, can be
characterized as improving the effectiveness of adaptation efforts. (Ghemawat, 2007)

1-Levers and sub-levers for adaptation

1-1-

Variation

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1-1-1- Products: Haier had a reputation for fast response to request for customization.
1-2-

Focus; reduce need for variation

1-2-1. Products: at first it focused on compact models.

1-2-2. Geographies: Haier first concentrated on US: first difficult ones, but later it expanded its
activities all around the world.
1-2-3. Segments: focusing on compact segment (retail prices $100-$600)
1-3-

Externalization: Reduce burden of variation

1-4-

Strategic alliances: Making alliance with Michael Jemal and Welbilt company

1-5-

Design: Reduce cost of variation

1-5-1. Flexibility: design business model to reduce fixed costs

1-5-2. Partitioning: having fixed (integral) parts and variable parts
1-5-3. Platforms; having one or two basic platforms per each category that can be developed into
hundreds of different SKUs.
1-6-

Innovation: improve effectiveness of variation

Haiers small-chest freezers had some innovative features including a bottom pull-out drawer,
which made it easier to find a deeply placed item
To save on shipping costs, Haier shipped spare service parts from China inside its freezers.
In its marketing, Haier focused on trade publications and less expensive media such as outdoor
and airport advertisements. Jemal used internet to reach college students.

1-6-1. Transfer: The whole idea of starting from US was to learn from difficulties from there and
use them.
1-6-2. Localization: form the case, it can be seen many forms of localization the idea of building
an American brand. The US marketing organization had 105 employees none of them were
Chinese. Many products were designed for US markets. Establishing a factory inside US
could be considered as localization.
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B. The response of the big three US producers to Haiers entry

4-Can you replicate the table refrigerator cost structure shown in Exhibit 10 and fill
in the missing cells?
Low-end 18.2 Cu-Ft Unit

Low-end 1.8 Cu-Ft Unit

US legacy
Union

US South
Non-Union

Mexico

China

US
legacy
Union

Mexico

China

100

US
South
NonUnion
100

Labor Productivity (index)

100

100

40

70

40

60

Payroll: Full Cost/Hour (US$)

25

17

3.5

1.5

25

17

3.5

1.5

Purchased materials and

components (index)
Depreciation and Facilities
cost (index)
Freight and Warehouse
Cost/Unit (US$)
Additional import shipping
cost (US$)
Price/Cost Structure per Unit
(US$)
Retail selling price

100

100

100

85

100

100

100

85

100

85

75

60

100

85

75

60

25

28

30

35

10

11

35

425

425

425

425

115

115

115

115

Net manufacturers price

300

300

300

300

82

82

82

82

Payroll

70

48

25

25

17

Purchased material and

components
Depreciation and facilities

180

180

180

153

47

47

47

40

25

21

19

15

10

8.5

7.5

Freight and warehouse

including ocean shipping
Total cost of goods sold

25

28

37

120

11

20

300

277

260

294

90

82

74

68

Gross profit

23

40

-8

14

Cost of goods sold

Table 2-Refregerator cost structure

5- From this completed table, what do you conclude about chinas cost advantage in
refrigerators?

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In small units (low end 1.8)Chinas plants have considerable advantage over plants in US and even
Mexico, however due to transportation and import costs in bigger units (18.2 Cu-ft) they are far less
profitable than Mexico and even US South non-Union factories
6- What arguments would support the view that the big three US producers should have
aggressively moved into the compact segment to thwart Haiers entry early? What
counterarguments could be made, that the big three should have ignored Haiers entry?
The main argument is in case of having new rival, the local competitors should be alert and watch
every move of it because if it succeed -even in an area which is not their specialty and main marketit would use this success and market as foot hold for the next moves which would be attacking their
main profitable markets. Secondly, if a foreign company comes from a long distance and approaches
a segment, there should be some potential in it so it could be their share. Furthermore, considering
Chinese specialty in cost effectiveness and combination with an American entrepreneur would be an
effective and influential combination and subsequently a dangerous one and if the Haiers unusual
approach to quality and management is considered the matter would be worse.
Counterargument: The big three with the possible exception of GE, traditionally had showed little
interest in compacts due to the fact that as specialty items they needed additional distribution channels,
were smaller markets, carried lower price tags and margins and did not need the more sophisticated
full-product-line merchandising of major appliances, which their organizations were used to do. Also,
these refrigerators had limited appeal to major appliance dealers, especially the independent dealers
that formerly dominated white goods retailing, whose sales people were trained to spend time with
customer to educate them to purchase thousands of dollars worth of goods. In addition, they could
argue the segment is not profitable enough and it is not our core business and considering the size of
their organizations entering this market just could be a noise to their system.

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7- How would you briefly describe the big three strategy for each of the three rough
product segments (compact, mid-size, full-size)?

GE was the traditional US leader in refrigerators and in 2006 still claimed 29% of the market, down
from 34% in 2000. While GE as whole was a global company, its white goods business was not. GE
sold refrigerators in the US under several brand names, including GE, Hotpoint (its economy brand)
and its premium high end GE profile and GE Monogram, where GE had its most profitable $2 billion
worth of sales. GE produced the widest price range of refrigerator models for US market. GE was
also strong in the lower-price, smaller unit product segments (including compacts, apartment size,
and the smaller end of the full-size range) and in the builder/contractor segment, which bought and
installed smaller units in the larger quantities in new or renovated buildings. These positions were
under severe price and volume pressure.GE had considered selling or spinning off the appliance
business.

Whirlpool was No. 2 in refrigerators with a 25% market share in 2004. In the US Whirlpool sold
under several brands including Roper (an economy brand) Whirlpool, Kenmore (for units sold to and
labeled by Sears) KitchenAid and high end, Whirlpool Gold and KitchenAid Architect. Whirlpool
traditional strength was its position as leading supplier to Sears, easily the USs largest major
appliance retailer. Sears accounted for an estimated 20% of Whirlpool white goods production. In
2006 Whirlpool acquired Maytag, formerly No.4 producer in the US for $2.7 Billion, winning over
a Haier bid. Maytags US brands include Maytag, Admiral and two economy brands, Jenn-Air and
Amana. Whirlpool was global in its sales, with only 61% of total sales in North America. It had
strong market positions in India and Latin America a modest but improving position in China and
was the No.3 or 4 player in Western Europe based on earlier acquisitions of Fiats and Philips white
goods businesses.

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Electrolux was No.3 in US white goods overall and had 25% of the standard refrigerator market up
from 21% in 2000. AB Electrolux in Sweden was the most internationally experienced of all
appliance makers, with production operations in over 40countries and 16 billion in sales, 45% of
which were in Europe and 6% in Asia. The company historically grew through cross-border
acquisitions and thus sold under dozens of brands. The early 2000 were a turbulent period for the
company globally as it restructured and radically reduced its number of products, local brands and
factories. Despite this reduction of operational complexity, appliance profitability both globally and
in the US continued to moderately decline. (Ghemawat, Haier's Strategy, 2009)

C. Haiers South Carolina plant

8- What are the arguments and counterarguments for Haier building its $40 million

South Carolina plant?

Business-Related:

Considering Haiers goal of building an American brand like Toyotas successful approach in US
via establishing manufacturing plants in US, it was a necessary action.

Most advanced capital equipment used in refrigerator manufacturing came from small number of
German, Italian, and Japanese companies.

Purchased materials and components ranged from 55%-65% of ex-factory prices and it should be
noted that compact refrigerators were relatively labor-intensive, while premium units were
relatively material and component intensive.

Key components (like compressors) came from common global suppliers based on best delivered
value and meeting product specifications. In addition, some materials such as coated steel or molded
plastics were purchased locally.

considering above points, it can be seen that only compact units are relatively labor intensive which
make them appropriate to be made in China (because other factors are the same) and to produce
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bigger or units with more features materials are more important . So, importing simple compact
units from China was logical but to enter into higher end of market establishing plants inside or
somewhere closer to market was necessary.
Mexico-related:

Mexico is a member of NFATA along with the US

Mexico has a common border with US

As can be seen from Table 2Mexico has an obvious and total advantage over other options for bigger
units, even for small units it could be justifiable.

Basically, all of the big players of refrigerator producers (big three, LG, Samsung) have some plants
in Mexico while the Big Three continued to spend hundreds of millions of dollars modernizing US
factories. As one Whirlpools executive once said: Mexico geographically is an advantage for us
in terms of exporting to the United States. Exporting from as far away as Asia just doesnt make
sense

Considering closeness of Mexico and US, running factories which needs supervision and calling on
by top management would be much easier than going to China.

Keeping in mind that there are more than 40 million Hispanic in US and many Mexican immigrants
in US the cultural distance is far less than with China.
China-related:

China is far away from US. Given relatively high transport costs, although Haier ships many underthe-counter refrigerators from China -the worlds lowest-cost production platform- to the US,
transport costs preclude the profitable export of large refrigerators-even before US tariffs are taken
into account.

China is not in a regional economical treaty with US

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There are some economic and political between US and China (about human rights, protectionism,
Yuan exchange rate, etc.)

On the other hand, higher costs of labor, and probably energy, working in alien country with
different rules and regulations and culture would endanger firms success.

9-What do you conclude about the South Carolina plant decision?

To begin building a local/American brand it was a wise decision, especially when production
of bigger units with more features are considered which are not labor intensive and
transportation costs makes them hard to import from China. However, keeping in mind that
all other competitors have plants in Mexico with more advantages over non union plants,
moving plant to Mexico or establishing a new one there would be a good strategy.

D. Haiers status and prospects in the US

10- What do you conclude about Haiers profits, product line and market positioning, and
market share in the US refrigerator market compared to where it wants to be on these
measures?
If creating a localized brand, competing against established companies (The Big Three) by being
more customer-focused using speed and differentiation are considered as main goals; Haiers success
to be one of USs four biggest and worlds seven biggest home appliance makers has been impressive.
It was market leader in compact units with 21% market share and also had 12% of the free standing
freezer market, placing it behind the leader Frigidaire and via building its factory in South Carolina
to manufacture full-size units start competing head to head against US leaders. It has more than 100
models in refrigerator market. Form mentioned argument it can be said Haier has achieved most of its
goals. However, its financial success cannot be evaluated accurately because the only reliable
evidence for Haiers profitability were its Shanghai listed arm accounting for about one-fifth of the
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groups revenue refer to Table 3 . The table shows Haiers declining operating profit as percentage of
sales since 2002 to 2007

11- What actions should Haier take in the short and long-term to increase its profits in
the US refrigerator market?

To continue and increase its marketing activities in branding itself as a American brand and
because now it has big market share using Mass Media is appropriate

To establish a new factory in Mexico, discussed as above.

To Use another retail stores other than the ones it already uses for example independent
stores control 35% of market share which is a considerable market to work with. Refer to
Exhibit 6(Ghemawat, Haier's Strategy, 2009) for other players information.

To pay attention to Chinas domestic market: bearing in mind economic recession and the
fact that China did not damage as much as others which was to some level because of
boosting domestic economy, to decrease risk having a better and bigger market share in
such a big, steady economy would be helpful and via using cash from domestic market
expansion projects in US could be financed. To expand domestically Haier could use its
influence in Chinese government to use state money or other institutional levers.

To diversify: not only in domestic market but also in US market, in this manner the risk
would be decreased and it would help making Haier a household name in American market
that everyone knows. Considering volatility of financial market and recent recession
diversification into this market should be approached in a prudent manner.
Table 3Qingdao Haier Refrigerator Company Financial Statements 2001-2007 (million Yuan)

Gross Sales
Cost of goods sold
Gross profit
Operating income
Net income
Consolodated net
income
GM% Sales
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2002
11,611,296
10,057,751
1,553,545
652,170
429,458
397,060

2003
11,731,745
9,972,234
1,759,511
607,482
394,652
368,953

2004
15,319,070
13,276,840
2,042,230
627,661
397,000
369,436

2005
16,522,672
14,567,235
1,955,437
439,324
249,742
239,127

2006
19,661,420
16,868,522
2,792,898
600,197
356,479
313,914

2007
28,783,629
23,182,819
5,600,810
797,042
754,286
643,632

13.4

14.9

13.3

11.8

14.2

19.4

Op Income % Sales
Consolidated Net Inc
% Sales

5.6
3.4

5.1
3.1

4.1
2.4

2.6
1.4

3.1
1.6

2.8
2.2

References
Ghemawat, P. (2009). Haier's Strategy. Harvard Business School.
Ghemawat, P. (2007). Redifining Global Strategy. Boston, Massachusetts: Harvard Business School
Publishing Coropration.

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